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Wedbush Securities Inc. Statement of Financial Condition and Report of Independent Registered Public Accounting Firm (SEC Identification No. 8-12987) June 30, 2019
Wedbush Securities Inc.Statement of Financial Condition and Report of
Independent Registered Public Accounting Firm
(SEC Identification No. 8-12987)
June 30, 2019
Contents
Page
Report of Independent Registered Public Accounting Firm 1
Statement of Financial Condition 2
Notes to Statement of Financial Condition 3
Wedbush Securities Inc. Statement of Financial Condition
As of June 30, 2019
See accompanying notes to statement of financial condition
2
(In thousands, except share data)
Assets
Cash and cash equivalents 21,657$
Cash and securities segregated for the benefit of clients 2,273,328
Receivables
Brokers, dealers and clearing organizations 647,617
Clients, net 502,741
Other 45,723
Collateralized agreements
Securities borrowed 3,220,463
Securities purchased under agreements to resell 1,888,883
Financial instruments owned, at fair value, including securities pledged of $55,725 57,196
Other assets 32,353
Total assets 8,689,961
Liabilities and shareholder's equity
Short‐term financing 159,536
Payables
Brokers, dealers and clearing organizations 45,225
Clients 3,227,708
Collateralized financing
Securities loaned 2,974,245
Securities sold under repurchase agreements 1,875,447
Financial instruments sold, not yet purchased, at fair value 9,031
Other liabilities 87,393
Total liabilities 8,378,585
Shareholder's equity
Common shares, $0.10 stated value; authorized 20,000,000 shares;
7,000,000 shares issued and outstanding 700
Investment in Wedbush Capital shares (1,885)
Additional paid‐in capital 14,017
Retained earnings 298,544
Total shareholder's equity 311,376
Total liabilities and shareholder's equity 8,689,961$
Wedbush Securities Inc. Notes to Statement of Financial Condition
June 30, 2019
3
(1) Organization
Wedbush Securities Inc. (the Company) is an investment firm headquartered in Los Angeles, California,that provides brokerage, clearing, investment banking, equity research, public finance, fixed income,futures and commodities, sales and trading, and asset management services to individual and institutionalclients predominately located in the United States of America. The Company is dually registered as asecurities broker‐dealer with the U.S. Securities and Exchange Commission (SEC) and a futures commissionmerchant (FCM) with the Commodity Futures Trading Commission (CFTC). The Company is a clearingmember of the New York Stock Exchange and Chicago Mercantile Exchange, as well as other stock andcommodity exchanges. The Company is also a registered investment advisor with the SEC and is a memberof the Financial Industry Regulatory Authority. The Company is wholly owned by Wedbush Capital(Parent).
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Company follows accounting principles generally accepted in the United States of America (U.S.GAAP), as established by the Financial Accounting Standards Board (FASB), to ensure consistentreporting of financial condition. The U.S. dollar is the functional currency of the Company.
(b) Use of Estimates
In preparing the Statement of Financial Condition, management is required to make certainestimates and assumptions that affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities as of the date of the financial statement. The most important ofthese estimates and assumptions relate to fair value measurements. Although these and otherestimates and assumptions are based on the best available information, actual results could differmaterially from these estimates.
(c) Fair Value
The Company accounts for its financial instruments at fair value in accordance with FASB AccountingStandards Codification (ASC) 820, Fair Value Measurements (ASC 820). The Company’s financialinstruments owned and financial instruments sold are carried at fair value and recorded on a trade‐date basis. All other financial assets and liabilities have a carrying value that approximates fair value.These financial instruments are short term in nature, bear interest at current market rates or aresubject to repricing.
(d) Cash and Cash Equivalents
Cash and cash equivalents are comprised of on demand deposits and highly liquid investments withmaturities of 90 days or less at the date of origination. Cash on deposit with financial institutions,may, at times, exceed federal insurance limits.
(e) Cash and Securities Segregated for the Benefit of Clients
Cash and securities segregated for the benefit of clients consist of cash and cash equivalentssegregated under the Commodity Exchange Act (CEA) and in special reserve bank accounts for theexclusive benefit of customers and proprietary accounts of broker dealers under Rule 15c3‐3 of theSecurities and Exchange Act.
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(f) Collateralized Agreements and Financings
Collateralized agreements consist of securities borrowed and securities purchased underagreements to resell (resale agreements). Collateralized financings consist of securities loaned andsecurities sold under agreements to repurchase (repurchase agreements). Where the requirementsof ASC 210‐20, Balance Sheet Offsetting (ASC 210‐20), are met, collateralized agreements andcollateralized financings are presented on a net‐by‐counterparty basis in the Statement of FinancialCondition.
Securities Borrowed and Securities Loaned Transactions
Securities borrowed and securities loaned transactions are recorded at the contract value of cashcollateral advanced or received, plus accrued interest. If recorded at fair value under ASC 820,Securities borrowed and securities loaned would be reported within either Level 1 or Level 2.Collateral in the form of cash is exchanged for securities borrowed, and is received for securitiesloaned, based on the approximate fair value of the related securities. The cash collateral is adjusteddaily to reflect changes in the current value of the underlying securities.
Resale and Repurchase Agreements
Resale and repurchase agreements are recorded at their contracted amounts. If recorded at fairvalue under ASC 820, Resale and repurchase agreements would be reported within either Level 1 orLevel 2. Contract values approximate fair value as they are subject to daily repricing. Resaleagreements require the Company to deposit cash with the seller and to take possession of thepurchased securities. Repurchase agreements require the buyer to deposit cash with the Companyand to take possession of the sold securities. The fair value of the securities sold or purchased plusaccrued coupon is generally in excess of the cash received or provided. The Company monitors thefair value of resale and repurchase agreements on a daily basis, with additional cash or securitiesobtained or posted as necessary.
(g) Receivables from and Payables to Clients
Receivables from and payables to clients include amounts on margin transactions and due or held incash accounts. Receivables from clients are generally fully secured by securities held in the clients’accounts. The value of securities, commodities and options on futures contracts owned by clientsand held as collateral or as margin is not reflected in the Statement of Financial Condition.
The Company establishes a reserve against accounts receivable for amounts that it determines in itsbest estimate may become uncollectible. Factors considered by management in determining theamount of the reserve include past experience, degree of concentration and quality of collateral.Receivables are presented net of reserves. The reserve as of June 30, 2019 was $1.5 million.
(h) Exchange Memberships
The Company’s exchange memberships, which provide the Company with the right to conductbusiness on the exchanges, are recorded at cost or, if other than temporary impairment in value hasoccurred, at a value that reflects management’s estimate of the impairment. There were no
Wedbush Securities Inc. Notes to Statement of Financial Condition ‐ continued
June 30, 2019
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exchange membership impairments at June 30, 2019. Exchange memberships are included in Other assets in the Statement of Financial Condition.
(i) Revenue Recognition
Commissions and other fees revenues and related expenses are recorded on a trade‐date basis astransactions occur and primarily include commissions earned from wealth management,correspondent and institutional clients.
Under clearing agreements, the Company clears trades for clients and retains a portion of thecommission for its services. The broker‐dealer commissions and remittal to the client are recordednet. The FCM commissions and remittal to the client are recorded on a net basis in Commissions andother fees, net in the Statement of Earnings.
The Company recognizes interest income on an accrual basis.
Revenues from investment banking are recognized when the services related to the underlyingtransaction are completed under the terms of the engagement. Underwriting revenues arepresented gross of related expenses.
Asset management fees are recognized monthly as earned and are based on the value of the assetsin the clients’ account balance at the end of the prior quarter.
Securities services revenues include correspondent trading and equity research fees. Additionally,securities services include per account fees such as revenues from fee‐based accounts and IRA fees,which are recognized into income as earned over the term of the contract.
The Company’s financial instruments are carried at fair value and recorded on a trade‐date basis.
Additional information regarding revenue recognition is included in Note 8 “Revenue from Contractswith Customers.”
(j) Income Taxes
The Company computes tax provisions in accordance with ASC 740, Income Taxes (ASC 740) on aseparate return method. Deferred tax assets and liabilities are recognized for temporary differencesbetween the financial reporting and tax bases of the Company’s assets and liabilities. Deferred taxesare adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized.
The Company follows guidance under ASC 740, which sets out a consistent framework to determinethe appropriate level of tax reserves to maintain for uncertain tax positions. Under ASC 740, theCompany determines whether it is more likely than not that an income tax position will be sustainedupon examination by tax authorities.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statementrecognition and measurement of tax positions taken or expected to be taken in a tax return.Sustainable income tax positions are measured to determine the amount of benefit to be recognized
Wedbush Securities Inc. Notes to Statement of Financial Condition ‐ continued
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in the Statement of Financial Condition based on the largest amount of benefit that is more likely than not to be realized upon ultimate settlement.
(k) Foreign Currency Translation
Assets and liabilities denominated in non‐U.S. dollar currencies are translated at exchange rates atthe end of a period.
(l) Recent Accounting Developments
Leases
In February 2016, the FASB issued ASU No. 2016‐02, Leases (Topic 842) (ASU 2016‐02), to increasetransparency and comparability among organizations by recognizing lease assets and lease liabilitieson the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016‐02, a lessee will recognize in the statement of financial condition a liability to make lease paymentsand a right‐to‐use asset representing its right to use the underlying asset for the lease term. Therecognition, measurement and presentation of expenses and cash flows arising from a lease by alessee have not significantly changed from current U.S. GAAP. ASU 2016‐02 retains a distinctionbetween finance leases (i.e., capital leases under current U.S. GAAP) and operating leases. Theclassification criteria for distinguishing between finance leases and operating leases will besubstantially similar to the classification criteria for distinguishing between capital leases andoperating leases under current U.S. GAAP. The amendments are effective for fiscal years afterDecember 15, 2018. The Company has substantially completed its assessment and will adopt ASU2016‐02 as of July 1, 2019 using the modified retrospective approach.
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU No. 2016‐13, Financial Instruments − Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments (ASU 2016‐13). The new guidance broadensthe information that an entity must consider in developing its estimated credit losses expected tooccur over the remaining life of assets measured either collectively or individually to includehistorical experience, current conditions and reasonable and supportable forecasts. ASU 2016‐13replaces the existing incurred credit loss model with the current expected credit losses model. Theamendments are effective for fiscal years beginning after December 15, 2019. The Company isevaluating the impact this ASU will have on its Statement of Financial Condition.
Fair Value Measurement Disclosure Framework
On August 28, 2018, the FASB issued ASU 2018‐13, which changes the fair value measurementdisclosure requirements of ASC 820. The ASU modifies the disclosure objective paragraphs of ASC820 to eliminate (1) “at a minimum” from the phrase “an entity shall disclose at a minimum” and (2)other similar “open‐ended” disclosure requirements to promote the appropriate exercise ofdiscretion by entities.
The objective of the disclosure requirements is to provide users of financial statements withinformation about assets and liabilities measured at fair value in the statement of financial conditionor disclosed in the notes to financial statements pertaining to: (1) The valuation techniques and
Wedbush Securities Inc. Notes to Statement of Financial Condition ‐ continued
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inputs that a reporting entity uses to arrive at its measures of fair value, including judgments and assumptions that the entity makes; (2) the uncertainty in the fair value measurements as of the reporting date; (3) how changes in fair value measurements affect an entity’s performance and cash flows. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. The Company is evaluating the impact this ASU will have on its Statement of Financial Condition.
(3) Cash and Securities Segregated for the Benefit of Clients
The Company segregates cash and resale agreements according to the regulatory standards of Rule 15c3‐3of the Securities and Exchange Act of 1934. These assets are held in segregated accounts at banks and areexclusively for the benefit of clients. Resale agreements are carried at the amounts at which the securitieswill subsequently be resold, as specified in the related agreements and consist of U.S. treasuries.
Clients’ funds, regulated under the Commodity Exchange Act, as amended, are required to be segregatedfrom the funds of the Company. Clients’ segregated funds and equities in clients’ regulated tradingaccounts, as shown in the Statement of Financial Condition, do not reflect the market value of optionspositions owned by clients and securities owned by clients and held by the Company as collateral or asmargin. Segregated funds consist of money market deposits and financial instruments owned guaranteedby the U.S. government.
The following is a disaggregation of Cash and securities segregated for the benefit of clients as of June 30,2019 (in thousands):
Cash and cash equivalents 1,091,108$
Securities purchased under agreements to resell 863,000
Financial instruments owned 319,220
Total cash and securities segregated for the benefit of clients 2,273,328$
The fair value of the short‐term investments obtained from counterparties as collateral on the resale agreements was $863.2 million as of June 30, 2019.
At June 30, 2019, assets segregated or held in separate accounts under Commodity Exchange Act regulations are as follows (in thousands):
Segregated for clients trading on U.S. futures exchanges
Cash and cash equivalents 295,150$
Deposits with clearing organizations 675,156
Receivable from clearing organizations 24,034
Total segregated for clients trading on U.S. futures exchanges 994,340$
Held in separate accounts for foreign futures and options clients
Cash and cash equivalents 2,870$
Deposits with clearing organizations 5,133
Total held in separate accounts for foreign futures and options clients 8,003$
Wedbush Securities Inc. Notes to Statement of Financial Condition ‐ continued
June 30, 2019
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Balances in the table above are included in Receivables from brokers, dealers and clearing organizations or Cash and securities segregated for the benefit of clients in the Statement of Financial Condition.
(4) Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Amounts receivable from and payable to brokers, dealers and clearing organizations result from theCompany’s normal trading and clearing activities and consist of the following as of June 30, 2019 (inthousands):
Securities failed to deliver 32,516$
Amounts due from brokers, dealers and clearing organizations 487,880
Deposits with clearing organizations 116,784
Trade date settlement receivable, net 10,437
Total receivables from brokers, dealers and clearing organizations 647,617$
Securities failed to receive 34,999$
Amount due to brokers, dealers and clearing organizations 10,226
Total payables to brokers, dealers and clearing organizations 45,225$
Securities failed to deliver and failed to receive represent the contractual value of securities that have not been delivered or received on or after the settlement date.
(5) Collateralized Agreements and Financing
The Company enters into collateralized agreements and financing transactions in order to, among otherthings, finance client activities, acquire securities to cover short positions and finance certain of theCompany’s assets. In many cases, the Company is permitted to deliver, repledge or otherwise use thesefinancial instruments as collateral for repurchase agreements, securities lending transactions, to meetmargin requirements at clearing organizations or to facilitate short sales of clients and the Company.
At June 30, 2019, the approximate value, excluding the impact of netting, of financial instruments receivedas collateral by the Company, in connection with resale agreements and securities borrowed, that theCompany was permitted to sell or repledge was $6.7 billion.
Securities financing transactions are exposed to credit and liquidity risk. To manage these risks, theCompany monitors the fair value of the underlying securities on a daily basis, with additional cash orsecurities obtained or posted as collateral as necessary.
Additionally, the Company, where appropriate, enters into master netting agreements with counterpartiesthat provide the Company, in the event of a counterparty default, with the right to net the counterparty’srights and obligations under such agreements and liquidate and set off collateral held by the Companyagainst the net amount owed by the counterparty.
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The following table summarizes the contract value and fair value of the securities obtained from or given to counterparties as collateral on collateralized agreements and financing as of June 30, 2019 (in thousands):
Contract Value Fair Value
Collateralized agreements
Securities borrowed 3,220,463$ 3,169,291$
Securities purchased under agreements to resell 1,888,883$ 1,906,788$
Collateralized financing
Securities loaned 2,974,245$ 2,889,815$
Securities sold under repurchase agreements 1,875,447$ 1,882,072$
The following tables present the carrying value of collateralized financings by class of collateral pledged and remaining contractual maturity as of June 30, 2019 (in thousands):
Repurchase agreements Securities loaned
U.S. government and agency securities 1,873,821$ ‐$
Asset‐backed securities 1,626 ‐
Municipal securities ‐ 32,279
Corporate debt securities ‐ 173,817
Equity securities ‐ 2,768,149
Total $ 1,875,447 $ 2,974,245
Repurchase agreements Securities loaned
No stated maturity and overnight 1,875,447$ 2,974,245$
Total $ 1,875,447 $ 2,974,245
In accordance with ASC 210‐20, the Company offsets financial assets and financial liabilities in the Statement of Financial Condition where there is a legally enforceable right to set off the recognized amounts and other offsetting requirements are met.
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The following table presents information about the offsetting of these instruments and related collateral amounts as of June 30, 2019 (in thousands):
Gross Amount
Amounts Offset in
the Statement of
Financial Condition
(a)
Net Amounts
Presented in the
Statement of
Financial Condition
Collateral
Received or
Pledged
(b)
Net Amount
(c)
Collateralized agreements
Securities segregated for the benefit of clients 863,000$ ‐$ 863,000$ 863,000$ ‐$
Securities borrowed 3,220,463$ ‐$ 3,220,463$ 3,169,291$ 51,172$
Securities purchased under agreements to resell 2,581,326$ 692,443$ 1,888,883$ 1,888,883$ ‐$
Collateralized financing
Securities loaned 2,974,245$ ‐$ 2,974,245$ 2,889,815$ 84,430$
Securities sold under repurchase agreements 2,567,890$ 692,443$ 1,875,447$ 1,875,447$ ‐$
(a)
(b)
(c)
Amounts relate to master netting agreements and collateral agreements which have been determined by the Company to be legally enforceable in the
event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance. There are no amounts which were
eligible for netting pursuant to ASC Subtopic 210‐20 that the Company did not net.
Securities collateral is reflected at fair value, but has been limited to the net exposure on the Statement of Financial Condition in order to exclude any over‐
collateralization.
Includes amounts subject to enforceable master netting agreements that have not met the requirements for offsetting in accordance with applicable
accounting guidance but are eligible for offsetting to the extent an event of default has occurred.
(6) Financial Instruments
The Company’s financial instruments that are carried at fair value include Financial instruments owned,Securities segregated for the benefit of clients and Financial instruments sold, not yet purchased.
(a) Fair Value of Financial Instruments
Fair value is defined under ASC 820, as the price that would be received to sell an asset, or would bepaid to settle a liability (i.e., the exit price) in an orderly transaction between market participants atthe measurement date. ASC 820 establishes a fair value hierarchy that prioritizes inputs to valuationtechniques used to measure fair value. The hierarchy gives the highest priority to the use ofobservable inputs and lowest priority to the use of unobservable inputs by requiring that the mostobservable inputs be used when available. Observable inputs are based on market pricing dataobtained from sources independent of the Company. Unobservable inputs reflect the Company’sjudgment about the assumptions market participants would use in pricing the asset or liability. Thethree levels of the fair value hierarchy based on observability of inputs are as follows:
Level 1 – Valuations based on unadjusted quoted prices available in active markets for identicalassets or liabilities.
Level 2 – Valuations based on quoted prices in markets that are not active, or for which all significantinputs are considered observable, either directly or indirectly.
Level 3 – Valuations based on inputs that are unobservable and have little to no market activity.Significant judgment by management is required for valuation of these financial instruments.
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In some instances, an instrument may fall into more than one level of the fair value hierarchy. In such instances, the instrument’s level within the fair value hierarchy is based on the lowest of the three levels (with Level 3 being the lowest) that is significant to the fair value measurement. The Company’s assessment of the significance of an input requires judgment and considers factors specific to the instrument.
(b) Valuation Technique
Financial instruments owned and Financial instruments sold, not yet purchased that are reported asLevel 1 are based on unadjusted quotes for closing prices from national securities exchanges as wellas reported bid and offer quotes from parties trading the security. If quoted prices are not available,fair values are obtained from pricing services or broker quotes, and are reported as Level 2. Duringthe year ended June 30, 2019, there were no changes to the valuation techniques employed by theCompany in determining fair value.
(c) Detail of Financial Instruments
The following table presents financial instruments at fair value as of June 30, 2019 (in thousands):
Level 1 Level 2 Level 3
Balance at
June 30, 2019
Assets
Financial instruments owned
U.S. government and agency securities 552$ 5,645$ ‐$ 6,197$
Municipal securities ‐ 42,270 ‐ 42,270
Corporate debt securities ‐ 107 ‐ 107
Equity securities 8,622 ‐ ‐ 8,622
Total financial instruments owned 9,174$ 48,022$ ‐$ 57,196$
Securities segregated for the benefit of clients
U.S. government securities 319,220$ ‐$ ‐$ 319,220$
319,220$ ‐$ ‐$ 319,220$
Liabilities
Financial instruments sold, not yet purchased
U.S. government and agency securities 4,699$ ‐$ ‐$ 4,699$
Municipal securities ‐ 70 ‐ 70
Equity securities 4,226 ‐ ‐ 4,226
Derivatives 36 ‐ ‐ 36
Total financial instruments sold, not yet purchased 8,961$ 70$ ‐$ 9,031$
Total securities segregated for the benefit of clients
Included in Financial instruments owned is $55.7 million of securities pledged as collateral to various counterparties.
Transfers between fair value classifications occur when there are changes in pricing observability levels. There were no transfers between levels during the year ended June 30, 2019.
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(d) Risks Related to Financial Instruments
In the normal course of business, the Company is involved in the execution, settlement andfinancing of various client and principal securities transactions. Client activities are transacted on acash, margin or delivery‐versus‐payment basis. Securities transactions are subject to the risk ofcounterparty nonperformance. However, transactions are collateralized by the underlying security,thereby reducing the associated risk to changes in the fair value of the security through settlementdate, or to the extent of margin balances.
The Company has sold securities that it does not currently own and will therefore be obligated topurchase such securities at a future date. The Company has recorded these obligations in theStatement of Financial Condition at June 30, 2019, at fair values of the related securities and willincur a loss if the fair values of the related securities increases subsequent to June 30, 2019.
The Company also executes client transactions in the purchase and sale of commodity futurescontracts (including options on futures contracts), substantially all of which are transacted on amargin basis subject to individual exchange regulations. Such transactions may expose the Companyto significant off‐balance‐sheet risk in the event margin requirements are not sufficient to fully coverlosses that clients may incur. In the event the client fails to satisfy its obligations, the Company maybe required to purchase or sell futures contracts at prevailing market prices in order to fulfill theclient’s obligations. The Company controls the risk by monitoring margin collateral levels on a dailybasis for compliance with regulatory and Company guidelines, and requires additional collateralwhen necessary. The Company requires a client to deposit additional margin collateral, or reducepositions, if it is determined that the client’s activities may be subject to above‐normal market risks.
(7) Credit Risk
The Company is engaged in securities and commodity clearing activities in which counterparties primarilyinclude clearing organizations, broker‐dealers and futures commission merchants. In the eventcounterparties do not fulfill their obligations, the Company may be exposed to credit risk. The risk ofdefault depends on the creditworthiness of the counterparty. It is the Company’s policy to review thecredit standing of each counterparty. The Company may require counterparties to submit additionalcollateral when deemed necessary.
(8) Revenues from Contracts with Customers
The timing of revenue recognition may differ from the timing of payment by customers. The Companyrecords a receivable when revenue is recognized prior to payment and the Company has an unconditionalright to payment. Alternatively, when payment precedes the provision of the related services, theCompany record deferred revenue until the performance obligations are satisfied.
The Company had receivables related to revenues from contracts with customers of $3.4 million at June30, 2019, in Other receivables in the Statement of Financial Condition. The Company had no significantallowance related to these receivables during the year ended June 30, 2019.
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(9) Income Taxes
The Company is included in the filing of the Parent’s consolidated tax return for federal tax purposes andin the Parent’s combined returns for certain states where such filing is required or permitted. TheCompany is also a party to a tax allocation agreement with its Parent. The Company has adopted themodified separate return approach, whereby the Company calculates its corresponding tax amounts inaccordance with the current enacted tax laws and rates while also considering those tax attributes that arerealized or realizable by the Parent and corresponding consolidated or combined group. The Companybelieves its adopted modified separate return approach is systematic and rational and has beenconsistently applied.
The Company had no material unrecognized tax benefits.
The Parent is no longer subject to U.S. federal examinations for the years before June 30, 2016, and, with afew exceptions, to state and local tax examinations for the years before June 30, 2015. The consolidatedgroup is currently under examination by the Internal Revenue Service for the tax year ended June 30,2017. While the outcome of the examination is unknown, the Company does not expect materialadjustments to result from this examination.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to
as the Tax Cuts and Jobs Act (the Tax Act). Among other changes, the Tax Act reduces the U.S. federal
corporate tax rate from 34% to 21%. The Company reasonably estimated the effects of the Tax Act and
recorded a provisional amount increasing income tax expense by $3.9 million in the Company’s financial
statements as of June 30, 2018 in accordance with SEC Staff Accounting Bulletin No. 118 (SAB 118). This
amount is related to the remeasurement of federal net deferred tax assets resulting from the permanent
reduction in the U.S. statutory corporate tax rate. As required by SAB 118, the Company continued to
reassess and refine the effects of the Tax Act on its deferred tax amounts. As a result, the Company
recorded an income tax benefit of $264,000 during the year ended June 30, 2019. As of June 30, 2019, the
Company has completed the accounting for the income tax effects of the Tax Act.
Included in Other receivables in the Statement of Financial Condition are net income taxes receivable fromthe Parent of $1.1 million at June 30, 2019.
The Company recognizes deferred tax assets and liabilities for future tax consequences attributable todifferences between the financial statement carrying amounts of existing assets and liabilities and theirrespective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences are expected to be recovered orsettled.
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Temporary differences and carryforwards, which give rise to deferred tax assets and liabilities, consist of the following as of June 30, 2019 (in thousands):
Deferred tax assets
Accrued expenses not yet deductible 4,659$
Deferred rent credit and other 1,174
Amortization of book‐tax difference 1,167
State taxes 783
Other 1,749
Total deferred tax assets 9,532$
Deferred tax liabilities
Unrealized gains (794)$
Depreciation (45)
Total deferred tax liabilities (839)
Net deferred tax assets 8,693$
The Company has reviewed its deferred tax assets to assess whether a valuation allowance should be established. Net deferred tax assets are included in Other assets in the Statement of Financial Condition. Management believes that it is more likely than not that the deferred tax assets will be realized. Accordingly, no valuation allowance has been established. Utilization of the deferred tax asset is dependent on generating sufficient taxable income at the Company and Parent.
(10) Net Capital Requirement
The Company is subject to the SEC’s Uniform Net Capital Rule 15c3‐1, which requires the maintenance ofminimum net capital. The Company has elected to use the alternative method permitted by the rule,which requires the maintenance of minimum net capital equal to the greater of $1.0 million or 2% ofaggregate debit balances arising from client transactions.
As an FCM, the Company is also subject to the net capital requirements of the CFTC Regulation 1.17 andrequirements of the National Futures Association, and is required to maintain adjusted net capitalequivalent to 8% of customer and noncustomer risk maintenance margin requirements on all positions.These CFTC regulations also prohibit a broker‐dealer from repaying subordinated borrowings, paying cashdividends, making loans to its parent, affiliates or colleagues, or otherwise entering into transactions,which would result in a reduction of its total net capital to less than 150% of its required minimum capital.An FCM’s ability to make capital and certain other distributions is subject to the rules and regulations ofvarious exchanges, clearing organizations and other regulatory agencies, which may have capitalrequirements that are greater than the CFTC’s.
The Company, as a dually registered broker‐dealer and FCM, is required to maintain net capital in excess ofthe greater of the SEC or CFTC minimum net capital requirements. At June 30, 2019, the Company had netcapital of $201.8 million that was 25% of aggregate debit items and $165.2 million in excess of the $36.5million required minimum net capital at that date.
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(11) Short‐Term Financing
The Company has the ability, through arrangements with multiple banks, to obtain secured and unsecuredshort‐term borrowings primarily through the issuance of promissory notes. Under these agreements, theCompany can borrow on demand up to a maximum of $350.0 million secured at interest rates determinedon the date of each borrowing, and reset daily.
At June 30, 2019, there were $74.5 million of short‐term borrowings outstanding under these securedcredit lines. The Company also has an uncommitted secured credit line at interest rates determined on thedate of each borrowing, and reset daily. At June 30, 2019, there were no short‐term borrowingsoutstanding under this secured credit line. In addition, the Company can borrow on demand up to amaximum of $95.0 million unsecured at interest rates determined on the date of each borrowing, andreset daily. At June 30, 2019, there were $85.0 million of short‐term borrowings outstanding under theseunsecured credit lines.
The loan agreements contain various financial covenants. The Company was in compliance with all suchcovenants for the year ended June 30, 2019.
(12) Benefit Plan
Effective January 1, 2019 (the Merger Date), the Company merged its two trustee‐directed definedcontribution retirement plans into one plan known as the Wedbush Securities Inc. Employees’ RetirementPlan (the Surviving Plan) qualified under Section 401(k) of the Internal Revenue Code. All Participantaccount balances under the prior plans have been combined with the Participant account balances underthe Surviving Plan as of the Merger Date. The merger was accomplished under terms and conditions that,in all respects, conform to Internal Revenue Code Section 414(1) and its underlying regulations as theyrelate to plan mergers. Employer contributions are based on a percentage of colleague compensation. TheCompany may match all or a portion of employee contributions through employer matching contributions.Annual contributions vest on a graduated scale based on completed years of service. At June 30, 2019,employer contributions payable to the plan were $3.7 million and are included in Other liabilities in theStatement of Financial Condition.
(13) Commitments, Contingencies and Guarantees
(a) Lease Commitments
The Company’s operations are conducted in leased premises under lease agreements requiringminimum annual payments as follows (in thousands):
Fiscal Years Ending
2020 7,898$
2021 6,078
2022 5,587
2023 2,555
2024 3,119
Thereafter 4,987
Total 30,224$
Wedbush Securities Inc. Notes to Statement of Financial Condition ‐ continued
June 30, 2019
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Certain leases have escalation clauses and renewal options.
During the year, the Company entered into an equipment lease agreement requiring minimum annual payments as follows (in thousands):
Fiscal Years Ending
2020 227$
2021 227
2022 170
Total 624$
(b) Contingencies
The Company is subject to various proceedings and claims arising primarily from securities businessactivities, including lawsuits, arbitration claims and regulatory matters. The Company is also involvedin other reviews, investigations, and proceedings by governmental bodies and self‐regulatoryorganizations regarding its business, which may result in adverse judgments, settlements, fines,penalties, injunctions and other relief. The Company is contesting the allegations in these claims,and believes there are meritorious defenses in each of these arbitrations, lawsuits and regulatoryinvestigations. The Company accrues for a settlement when a liability is deemed probable andestimable.
At the present time, the Company does not expect the ultimate resolution of the matters describedabove to have a material adverse effect, beyond accrued loss contingencies, on the Company’sStatement of Financial Condition.
(c) Guarantees
FASB ASC 460, Guarantees (ASC 460), requires the Company to disclose information about itsobligations under certain guarantee arrangements. ASC 460 defines guarantees as contracts andindemnification agreements that contingently require a guarantor to make payments to theguaranteed party based on changes in an underlying factor (such as interest rate or foreignexchange rate, security or commodity price, an index or the occurrence or nonoccurrence of aspecified event) related to an asset, liability, or equity security of a guaranteed party. This guidancealso defines guarantees as contracts that contingently require the guarantor to make payments tothe guaranteed party based on another entity’s failure to perform under an agreement, as well asindirect guarantees of the indebtedness of others.
The Company is a member of various clearing organizations that clear derivative contracts.Associated with its memberships, the Company may be required to pay a proportionate share of thefinancial obligations of another member who may default on its obligations to the exchange or theclearinghouse. While the rules governing different exchange or clearinghouse memberships vary, ingeneral the Company’s guarantee obligations would arise only if the exchange or clearinghouse hadpreviously exhausted its resources. The maximum potential payout under these membershipagreements cannot be estimated. The Company has not recorded any contingent liabilities in theStatement of Financial Condition for these agreements and believes that any potential requirement
Wedbush Securities Inc. Notes to Statement of Financial Condition ‐ continued
June 30, 2019
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to make payments under these agreements is remote and not material to the Statement of Financial Condition.
(14) Related‐Party Transactions
The Company enters into securities transactions and other transactions with related parties. At June 30,2019, balances with such related parties were included in the Statement of Financial Condition as follows(in thousands):
Assets
Receivables ‐ Clients 36,403$
Receivables ‐ Other 19,478
Securities purchased under agreements to resell 1,626
Total assets 57,507
Liabilities
Payables ‐ Clients 66,306
Total liabilities 66,306$
In the normal course of business, officers, directors, relatives of officers and directors, and affiliates may buy and sell securities through the Company. Receivables from officers, directors and relatives were primarily composed of receivables collateralized by Parent shares held in their accounts at the Company and are recorded within Client receivables in the Statement of Financial Condition.
The Company has agreements with affiliates for other activities, including a tax sharing agreement with the Parent as described in Note 9. Unsettled amounts for these activities are recorded within Other receivables in the Statement of Financial Condition.
Notes receivable from colleagues are generally from recruiting activities and are noninterest‐bearing. The notes are typically forgiven over a period of three to eight years. Notes receivable from colleagues are included in Other receivables in the Statement of Financial Condition.
At June 30, 2019, the Company had resale agreements outstanding with the Parent. On August 23, 2019, the Company remitted $6.0 million of its excess distributable retained earnings to the Parent as a cash dividend.
The Company has an agreement to unconditionally guarantee the obligations of Lime Brokerage LLC (Lime) under a master equipment lease agreement. Each equipment lease is 36 months in duration and Lime is current in its obligations under the agreement. Lime has future minimum lease payments under this agreement of $57,000 and $21,000 for the years ending June 30, 2020 and 2021, respectively.
(15) Subsequent Events
The Company has evaluated all events subsequent to June 30, 2019, up until the date the Statement ofFinancial Condition was issued, and, except as disclosed, has determined there were no events ortransactions during said period that would require recognition or disclosure in the Statement of FinancialCondition.
